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CMA Intermediate · Financial Accounting · Accounting for Government Grants (AS 12)

Sundaram Textiles Ltd supplies cloth to a state government department at the same prices and terms it charges private customers, and the sales are ₹40 lakh for the year. How should this ₹40 lakh be treated under AS 12?

The ₹40 lakh is not a government grant. AS 12 excludes transactions with government that cannot be distinguished from normal trading transactions of the enterprise. Sales at ordinary prices and terms are simply sales revenue, accounted for under the normal revenue recognition rules.

  1. AAs a government grant, recognised in the profit and loss statement over the useful life of its plant
  2. BAs a government grant credited to capital reserve
  3. CAs a government grant, recognised only when cash is received
  4. DNot as a government grant, because the transaction cannot be distinguished from normal trading transactionsCorrect

Explanation

AS 12 excludes transactions with government that cannot be distinguished from the enterprise's normal trading transactions. Sales on ordinary commercial terms are revenue from operations, not grants. The other options wrongly treat them as grants.

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